HB1815.DOC

SECTION 1. The legislature finds that inflation erodes the value of the standard deduction, personal exemption, and income tax brackets, and reduces the purchasing power of taxpayers in Hawaii. Given that the residents of our state are faced with a high cost of living, it is vital that the legislature recognize this issue and maintain the value of any and all earned income and the value of the dollar for taxpayers.

The income tax laws of Hawaii, combined with the effects of inflation, have created a problem for taxpayers, due to the application of inflexible, statutorily prescribed amounts for the standard deduction, personal exemption, and tax rate brackets to increasing personal incomes. This has resulted in increasing taxpayers' tax liability, while keeping taxpayers' purchasing power the same, or in some instances, even decreasing it.

The legislature's intent is to help reduce the impact of

inflation on the income earned by Hawaii taxpayers. Inflation reduces the purchasing power of taxpayers by increasing prices and reducing the value of money. Annual adjustments to taxpayers' standard deductions, personal exemptions, and income tax rate brackets would mirror the rate of inflation and ensure that taxpayers are not financially harmed by the effects of inflation and that the value of their dollar is maintained.

Indexing for inflation is crucial to help alleviate the strain of our state's high cost of living, especially in the wake of the recent economic downturn. Various reports have highlighted the financial challenges of living in Hawaii. In one 2013 study ranking all fifty states based on income, taxes, cost of living, unemployment, and workplace environment data, Hawaii, despite having the best workplace-environment score, placed last. In another 2013 study ranking all fifty states across ten categories ranging from the cost of doing business and cost of living to infrastructure and quality of life, Hawaii also placed last in the nation. The only category in which Hawaii scored higher than thirty-ninth was quality of life, where it placed first. Furthermore, in 2013, Honolulu was considered the second most expensive city in America in which to

live. Utilities, groceries, transportation, and gasoline are all at least twenty-one per cent higher than the national average and the statewide cost of living is sixty-seven per cent higher than the national average.

The idea of indexing for inflation is not new, and many other states and the federal government make adjustments for inflation. Fourteen states and the Internal Revenue Service index their tax brackets; thirty-one states and the District of Columbia and the Internal Revenue Service index their standard deduction amounts; and eighteen states and the District of Columbia and the Internal Revenue Service index their personal exemption amounts.

The purpose of this Act is to require the director of taxation to annually adjust the standard deduction, personal exemption, and income tax rate brackets for inflation.

SECTION 2. Chapter 235, Hawaii Revised Statutes, is amended by adding two new sections to be appropriately designated and to read as follows:

"§235-A Annual adjustments for inflation. (a) For taxable years beginning after December 31, 2013, the director of

taxation shall, by official pronouncement, multiply the cost-of-living adjustment for the calendar year by the dollar amounts contained in the following sections of this chapter:

(1) The standard deduction amounts provided in section 235-2.4(a);

(2) The minimum and maximum taxable income rate bracket dollar amounts provided in sections 235-51(a),(b), and (c); provided that the rate applicable to each income bracket may not be changed; and

(3) Every personal exemption multiplier amount provided in section 235-54, except for subsection (b).

If any of the dollar amounts, as adjusted, are not multiples of $50, any increase must be rounded to the nearest $50.

(b) No adjustments pursuant to subsection (a) shall be made when the consumer price index for the twelve-month period ending June 30 of the preceding calendar year is less than zero or when the cost-of-living adjustment would reduce the previously established standard deduction, personal exemption, and income tax bracket amounts and levels.

"Consumer price index" means the average over a twelve-

month period of the National Consumer Price Index, not seasonably adjusted, published monthly by the Bureau of Labor Statistics, United States Department of Labor, designated as the "National Consumer Price Index for All Urban Consumers-United States City Average."

"Cost-of-living adjustment" means the consumer price index for the twelve-month period ending June 30 of the preceding calendar year divided by the consumer price index for the twelve-month period ending June 30, 2012.

§235-B Report to the legislature. Upon the repeal of this Act, the department of taxation shall submit a report to the legislature no later than twenty days prior to the start of the regular session of 2020, containing an evaluation and analysis of the implementation and effectiveness of the adjustments made to the standard deduction, personal exemption, and income tax brackets made by this Act along with recommendations for possible future legislation."

SECTION 3. New statutory material is underscored.

SECTION 4. This Act shall take effect upon its approval and shall apply to taxable years beginning after December 31,

2013, and through and including the tax year ending December 31, 2018; provided that this Act shall be repealed on January 1, 2019.

INTRODUCED BY:

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HOUSE OF REPRESENTATIVES	H.B. NO.	1815
TWENTY-SEVENTH LEGISLATURE, 2014
STATE OF HAWAII